The Fintech or financial technology industry today is constantly disrupting the financial services ecosystem. They’re not only forcing banks to change their business operations but bringing in automation to deliver a seamless customer experience.
Opening banking is a perfect example of the ongoing disruption. It’s enabling banks to collaborate with Fintech platforms to adopt open API technology and stay ahead of peers. These APIs help banks:
- Meet the changing needs of existing customers and appeal to prospects
- Increase customer satisfaction through Banking as a Service products
- Provide secure, agile, and future-proof banking methods.
Though a fairly known concept in the financial services industry, the actual realization, and adoption of the open-banking system increased after the outbreak of the COVID-19 pandemic.
This blog is a TL/DR of a keynote speech by Akash Sinha, CEO and Co-founder, Cashfree Payments, at Techsparks 2021. He walks us through his thoughts on why API banking is fintech’s next big bet and how banks and fintechs are working together to offer new and improved banking services to end customers.
Here’s a synopsis of this interesting session.
API banking is Fintech’s Next Big Bet
Here’s the logical reasoning behind this perspective.
The concept of banking has been around for ages – probably since the first currency was minted. However, the proof of concept and their benefits were realized after the industrial revolution.
Banks primarily focused on the fiscal distribution of paper in the localized network of buildings and humans during their initial phase of establishment. Today’s they’ve come a long way. Banks are experiencing digital evolution where everything’s revolving around the distribution of data over globalized networks focused on software and servers.
Amidst this, traditional banks are finding it difficult to exit their preset constraints because it’s difficult to fundamentally change their conventional banking structures.
In come the Fintechs and their revolutionary solutions that are helping transform these monolith, lethargic organizations into fast-paced, customer-centric digitized institutions.
Open-banking API is one such Fintech solution that’s focused on enabling monoliths to use robust, customer-centric products and services that ensure the best overall customer experience.
Complete Open sourcing of financial services through:
This leads to competition and collaborations between incumbents and traditional banks.
The rise of open-banking API is primarily due to 3 major reasons:
- A rise in customer expectation
- Competition of fintech
- A rise in the regulatory environment
Implementation of API in Banking Sector
Application programming interfaces (APIs) have made it fairly easy for software developers to build more applications. For the banking sector, they represent a lot more.
APIs enable easy access to banking services, products, and data. This ‘easy access’ lets them unlock a range of business opportunities, add the impact of regulation, and they change again, becoming agents of disruption with transformative potential.
They’re, in fact, multipurpose tools that:
- Enable compliance in local banking regulations
- Give access to the ecosystem of related businesses, and
- Simplify legal systems
“APIs represent a significant opportunity to innovate, work more efficiently, and develop new and better banking products and services”Akash Sinha, CEO and Co-founder, Cashfree Payments
In terms of an API implementation, it’s a steep climb that many banks are trying to mount. They’re taking initial steps to enhance their quality in regard to technology development, customer engagement, and business expansion.
China, for example, has various ecosystem models. It’s bringing together Fintechs, companies, banks, and other financial service providers to buy and sell products, share technology, and expand their networks. Meanwhile, banks in countries like the USA and Europe have started getting involved or investing in Fintechs to create new revenue streams for a more tailored customer experience.
Today, India too has many tech-first banks that are changing the mindset and skill-set of modern banking. They’re forcing banks to inculcate customer-centricity in their hearts and evolve from being product pushers to customer engagers.
Next stage of Evolution – From Internal Banking Protocol to API-led Banking
The introduction of NEFT, RTGS, and IMPS by RBI and NPCI respectively, marked the beginning of digital online banking in India. It served as a paradigm shift in the way banking services were offered to the end customer.
The next stage of evolution was the shift from internal banking protocol to API-led banking.
API-led banking has brought about a significant change in how financial operations are carried out today. Innovators now have more flexibility to:
- offer better banking features through streamlined financial services
- cater to competition
- Introduce more innovative fintech products in the market
From a customer’s POV, today you can have a single view of all your finances and even control, track, and analyze your financial movement, all in one place.
Meanwhile, Fintechs are heavily using open-banking API services (among others) to:
- Give account balances in real-time
- Control, track, and analyse all financial movements, in one single place
- Process vendor payments at high speed
- Reduce administrative hurdles to manage finances such as applying for a business loan, checking your credit worthiness, etc.
- Enhanced visibility of cash position, cash flow, and more
Data analytics and Open Banking API
Data analytics today lies at the heart of the open-banking API evolution. Banks can now collect substantial quantities of data related to customer behavior that enables them to create more tailored products and services and also run specific marketing initiatives.
For instance, banks can get a more realistic picture of a customer’s financial situation using APIs. This, in turn, can help them create the right lending products.
Banks continue to be the custodian of consumer finances. However, they need Fintech(s) with strong banking APIs in their arsenal. Fintech(s) can offer greater innovative products and services along with better technology that helps create a customer interface that leads to larger customer adoption and customer delight.
Banks and players in the payments industry are collaborating to leverage the benefits of data analytics and API banking to create customer-centric solutions. Meanwhile, third-party institutions are using the two solutions to build personalized offerings.
BaaS and Open Banking API
Open-banking APIs are also essential for the functionality of Banking as a Service (BaaS). It’s fast in popularity as a concept under the open banking umbrella. It involves banks opening APIs of the fintech players.
However, it goes beyond data checks. BaaS allows third-party companies to offer banking solutions embedded in their own financial offerings. It’s not about accessing financial data, rather about the functionality of the core financial services.
BaaS provides customers with a wide variety of financial services. Moreover, it ensures increased transparency. It also increases competition in the financial services domain. Both banks and third-party companies benefit from the accommodation and offer the best services to the customers.
The battleground is all set for another digital revolution in the banking industry being played between digital consumers and digital banks. APIs are the arsenal that will provide the ammunition. The banks of the future can stand victorious only if they’re able to provide the most unique services to the customers based on their digital footprint and financial lifestyle.
To sum up, if financial services were an organism, API is the new gene embedded in its DNA. No doubt, this mutation will create a new paradigm in the API banking system, the potential of which is yet to be fathomed.